You purchase a new lawnmower
or expensive clothinig in a large store.The
store tells you they will give you a 10% discount if you sign up for their credit
card. You agree to the new credit card.

The store believes
that you will use their credit card for future purchases, but you will not pay
off the full balance every month. Therefore, they will make money off you through the 18% to 28% interest rates on that card. Your 10% savings disappears rapidly
as you pay these high interest rates.

Smile!You were just financialized. This is now common throughout many business models.

In simple terms, the store is no longer operating on a
capitalist model as it tries to sell you services and products which are better than its
competitors. Instead, it is using a financialist model whereby they take your
money over a longer period of time by driving you into debt . You are
now working for them through the interest payments. It is a legalized form of debt slavery.

Financialization as a
Business Model – Why is this a Bad Thing?

This
model hurts the overall economy. By putting more and more money into the hands
of the banks and financial industry, less money goes into productive industries
that create real employment and growth for everyone. In economic terms, it can
be said that financialization is distorting the economy through the
misallocation of capital into non-productive sectors.

The Killer

Bankers formerly served the economy by
assisting the flow and allocation of capital.Now, the banking and financial industry has become so powerful that the
economy and polity are serving it.And
it hurts everyone.

What can be Done?

Most politicians and
regulators are unwilling to challenge the financial industry as the banks are
so powerful that elected officials fear them.(See http://tinyurl.com/cdrnm7f)

As a consumer, you can
choose to simply avoid using these systems.Don’t get that new credit card from the hardware store or clothing
store. Pay cash or walk away. Buy from a locally owned store
rather than a large franchise chain.You
will likely get better products and service and enjoy better value over the
long term.With food products, you are also
safer and will remain healthier if you buy local. (See http://tinyurl.com/a5dz86b )

If you cannot afford
to pay off the credit card each month, then do not buy more stuff. Wait until you can pay
cash.Look at your credit card
statements and see how much you are paying in interest. Then figure out how
much that is per year. You will be shocked at how much it costs you to have
been financialized. When you do buy
something from a local store, use cash if you can. The credit card companies
are charging three percent or more on every sale –so that is money leaving
your community.

Outlook

The next major
financial crisis may cause a reset in the way we do business. When this happens
is not clear, but the next crisis will be worse than the events of 2007 and
2008.When the crisis does occur, there
may be a new model put in place that removes the banks and financial institutes
from their place at the top of the power hierarchy.

Financialization is a process whereby
financial markets, financial institutions and financial elites gain greater
influence over economic policy and economic outcomes. Financialization
transforms the functioning of economic system at both the macro and micro
levels. Its principal impacts are to (1) elevate the significance of the
financial sector relative to the real sector; (2) transfer income from the real
sector to the financial sector; and (3) increase income inequality and
contribute to wage stagnation. There are reasons to believe that
financialization may render the economy prone to risk of debt-deflation and
prolonged recession. Financialization operates through three different
conduits: changes in the structure and operation of financial markets; changes
in the behavior of non-financial corporations, and changes in economic policy.
Countering financialization calls for a multi-faceted agenda that (1) restores
policy control over financial markets, (2) challenges the neo-liberal economic
policy paradigm encouraged by financialization, (3) makes corporations
responsive to interests of stakeholders other than just financial markets, and
(4) reforms the political process so as to diminish the influence of
corporations and wealthy elites.

Wednesday, March 27, 2013

Savers around the
world have been watching the Cyprus scenario unfold as depositors money is
quite suddenly up in the air. Canadian savers may want to know that the government there is making its own plans for a Cyprus style scenario.Talk about a Canadian Economic Action Plan!

Canadian Government Action Plan Logo

In the event that a
“to big to fail” bank were to approach collapse in Canada, it would appear that
the money deposited in the banks could be taken and then used to keep the bank
viable.The following words can be found
on pages 144 and 145 of Jobs Growth and Long Term Prosperity – Economic Action
Plan 2012 as tabled in the House of Commons by the Hon. James Flaherty, Minister of Finance
on 21 March 2013.This is otherwise
known as the budget.

Systemically important banks will continue to
be subject to existing risk management requirements, including enhanced
supervision and recovery and resolution plans.

The Government proposes to implement a bail-in
regime for systemically important banks. This regime will be designed to ensure
that, in the unlikely event that a systemically important bank depletes its
capital, the bank can be recapitalized and returned to viability through the
very rapid conversion of certain bank liabilities into regulatory capital.
This will reduce risks for taxpayers. The Government will consult stakeholders
on how best to implement a bail-in regime in Canada. Implementation time lines
will allow for a smooth transition for affected institutions, investors and
other market participants.

Before drawing conclusions,
what do these words say?

First – “systemically
important banks”. This means banks that are perceived as being too-big-to-fail
(TBTF). The Office of the Superintendent of
Financial Institutions (OFSI) identified six banks in Canada as being
systemically important within the last week.They are the Royal Bank of Canada, the Toronto-Dominion Bank, the Bank of Nova Scotia, the Bank of Montreal,
the Canadian Imperial Bank of Commerce and the National Bank of Canada. This
was a bit of a surprise to some observers, as it had been thought that only the
RBC was TBTF.

Second – there is
discussion ofa “bail-in regime.”You should start getting nervous here.A bail out is when an outsider gives the institution
in trouble more money so it can keep going. A bail-in is when money from within
the institution is used for the bail out and then those whose money was taken
are given something in return.Typically, those who have their money taken are offered shares in the
institution in the hope that the institution will prosper again in the future
and the shareholders can still have value. This was just done over the last few
years in Spain. It did not work out too well.See http://tinyurl.com/c9ds5b9.

Third – we see the
words in the unlikely event that a
systemically important bank depletes its capital.In
other words, if a bank suddenly goes broke.This could be due to unforeseen loses such as a complex derivative
contract that failed.See a simple
explanation of derivatives at http://tinyurl.com/blhtc3q

Fourth – there is the
phrase the very rapid conversion of
certain bank liabilities into regulatory capital.The words “certain bank liabilities” is a
fancy way of saying deposits. When you deposit a hundred dollars in a bank,
this shows up on their spread sheet as a liability.So what this phrase says is that bank
deposits could be taken up and used by the bank and it could be converted into
regulatory capital.Regulatory capital
is another way of saying banks must keep a certain amount of money on hand for
meeting daily requirements such as withdrawals for deposits. The minimum amount
that must be kept on hand is determined by the regulator. In this case the regulator is OFSI.

So what does this all
mean?

In short, it says that
if a Canadian bank suddenly finds itself in financial trouble, money from depositors can
be takenin a “bail in” and used to keep
the bank solvent.Those who had their
money taken would be given shares in the bank or some other form of compensation
such as bonds.

Should you be worried?

The document does not
say so, but in such desperate circumstances, it might be assumed that the
deposits taken would be those that have more than $100,000.Account below $100,000 dollars are
guaranteed by the Canadian Deposit Insurance Corporation. So, small account
holders should be OK.

Canada is not alone in doing this. The UK and
the USA have a similar plan they discussed in December of 2012.See http://tiny.cc/z4jcuw

This is economics for the rest of us! Enjoy the ride in the new economy.

Weapons of mass
destruction exist in the financial sector. They are called derivatives. Here is a simple explanation of what they are
written by ex-central bankers.You
should care, as they may destroy the financial system as we know it and all of
us will be hurt.

No one really knows
how much damage could be done by an unwinding in the derivatives market, but the
total exposure (potential losses) may be as high as 700 Trillion
dollars (yes that is with a T).JP
Morgan alone may have as much as $90 trillion exposure.Other financial institutions such as Goldman
Sachs, Citigroup, RBS , UBS and RBC all have large exposures.

Farmers are planting
wheat in the spring. They do not know what success they will have this year.
Next to them is a flour mill which will grind their wheat.Down the road is an investor, and he would
like to make money off the wheat crop without doing work, but he is willing to
take some financial risk.

The investor tells the
flour mill the owner “It is only the spring, but I will give you money now in
exchange for letting me control who uses your mill in the fall.”

The owner of the mill
accepts the money, reasoning that he can make an average year’s profit for his
mill off just this one investor, even if the crop fails completely.

The crop is successful
and the farmers arrive at the mill. The investor charges them to gain access to
the mill and the mill grinds the wheat into flour.

The investor makes
money by charging the farmers more than they would have paid the mill owner,
but the investor now controls access to the mill for the season, so the farmers
have no choice.

The investor made
money not through his labour (the farmer) or by offering a service (the mill
owner).The investor derived his money (i.e. a derivative) by essentially betting that
the price of wheat would stay high and the crop would be good.If the crop had failed completely, the
investor’s derivativewould have failed and he would have lost all his
money.

So, in economic terms,
a derivative is a contract
whose value is derived from the performance of underlying market factors, such
as market securities, indices, interest rates or equity prices.In this case, the underlying factor was the
amount of wheat to be produced and its price which was not known in the spring
of the year.

Can Derivatives
be a Good Thing?

Yes.Consider a medium sized trucking company that
has just received a major contract for two years of shipping.They are worried that they could lose money
on the contract if the price of diesel fuel goes up suddenly. They approach an
investor for a derivative.The investor
agrees to guarantee the price of fuel to the trucking company for the next two
years. The price of the fuel will be higher than the current market price, but
the trucking company believes they can still make a profit, even at the higher
price, so this is good for them. The investor believes that the various rises
and falls in diesel prices will allow him a profit.

In this case, the
trucking company has been able to outsource its risk (fuel price) to an
investor in order to sign the contract with confidence.

Why did
Derivatives Turned out to be Dangerous?

The key issue
lies in the outsourcing of risk. An intelligent use of derivative can allow a
business to outsource its risk. Unfortunately, the folks on Wall Street and in
The City have found increasingly complex methods of using derivatives to outsource
risk.They believe that they can be
almost risk free by covering all their investment risks with derivatives.

They have done
this so much, there is now believed to be some 700 trillion dollars worth of
derivative contracts out there – most of which are beyond the understanding of
those who supposedly regulate finance markets. The risk involved is also beyond
the understanding of the financial institutes involved.

The Killer

The financial
institutes such as JP Morgan, UBS and CITI believe they have outsourced risk. But here is the killer. Everyone
one of them is busy outsourcing risk by selling derivatives to other financial
institutes. In other words, they are all outsourcing their risk to each
other.This is a closed loop with a
finite amount of players. If everyone thinks they have outsourced their risk to
everyone else, then they are collectively holding all the risk.They are all vulnerable.

The end result is
that the financial institutes that thought they were outsourcing risk may find
they have to make payouts on the derivatives they bought and sold. The amount
will exceed their resource levels and therefore they will go bust.If there is another financial shock like the
2008 crisis, then the entire derivatives bubble may pop and the process will
unwind on itself.

And then there are synthetic derivatives and synthetic derivatives combined with options trading, but might might be a story for another day.

Once again, we
may see the financial institutes lining up for more bailouts if this market unwinds.

This is economics
for the rest of us. Financial derivatives should be seen as a weapon of mass
destruction.

Recent events in
Cyprus, Spain and in the EU have shown that the previously taboo practice of taking
your savings money has been broken.Governments and banks, driven by the need for cash are exploring all
possibilities. Like sharks, they must constantly move ahead to continue their intake of prey.
﻿

Consider the statement
of Mr Jeroen Dijsselbloem (pronounced Diesel Boom?),
the former Dutch Finance Minister who is now President of the Eurogroup Council.He stated that what happened in Cyprus is a
template for what can happen next. He adds:

“If
there is a risk in a bank,” he said, “our first question should be ‘Okay, what
are you in the bank going to do about that? What can you do to recapitalize
yourself?’ If the bank can’t do it, then we’ll talk to the shareholders and the
bondholders, we’ll ask them to contribute in recapitalizing the bank, and if
necessary the uninsured deposit holders.”

In other words, shareholders and bond
holders can expect a major haircut.

Then consider what the Bank of England and
the American Federal Deposit Insurance Corporation (FDIC) have been jointly considering
how savings deposits which are said to be guaranteed for the average saver or depositor
will instead be used to bail out failing banks.Hard to believe. (See more on this at http://tiny.cc/z4jcuw
)In other words, savers who thought their
deposits were guaranteed for up to the first 100,000 may want to rethink that
position.

In Spain, the Finance Minister has said
that the Spanish government will put a levy (read tax) on banks based on the total
amount of savings they hold.Bank
account holders in Spain can expect to pay this indirect tax through higher
fees and lower service levels.(See more
at: http://tinyurl.com/cedrumy)

To reduce this to its most basic, the logic
and math of the economists says:

Banks and governments need more money to
sustain their debt and overleveraged risks.

They cannot raise more through taxing a
declining economy.

They are running out of accounting tricks
to kick the can down the road.

Printing money is not working.

Savers have money.

The banks and the governments will
change the rules so they can get the money.

Seen collectively, the economists who work
for the banks and the government know where your money is and they need it.
They are casting a predatory eye on your savings.

Unfortunately, the politicians will not
stop this. Their own positions are closely aligned to the banks so they will
assist the process. (See http://tinyurl.com/cdrnm7f)

Reduced to its most
basic, the financial crisis that started in 2008 and what we now see in Cyprus occurred because
of debt.Governments in general have
been on a spending spree since the mid-1980s. They are running out of tax money
and have used up almost all the accounting tricks which allow them to kick the
debt can down the road.At the same
time, the banks allowed themselves to become “overleveraged.” This is a polite way of saying they took a
series of incredibly high risks with saver’s money and now those risks are blowing
up. They also have huge exposure or potential loses through derivatives as well.

Stripped of all the
economic, financial and governmental jargon, here is the issue and why you
should be afraid if you are a saver.

1. Governments are
holding massive debt and unfunded liabilities and they need more money.

2. Banks are often
over leveraged and they need/want more money to prop up their risks.

3. Savers have cash
and other assets.

4. Governments and
banks will change the rules so they can take this money.

5. Savers will lose
their money and debtors will gain from this.

How are they taking
your money?Sometimes it is quite clear
how they take your money, other times it is difficult to appreciate what they
are doing to you.However, here are the
main ways it is happening:

1. Tax or levy:The government can simply impose a direct tax
or levy on your individual savings account. This is what just happened in
Cyprus.

2.Indirect
tax or levy:The government can take an
indirect tax by taking money from the banks based on their total holdings of
savers money. Then the banks have to make this back from the savers. This is
what Spain is doing.See http://tinyurl.com/cedrumy

3.Taking depositor’s insurance money:The government can plan to take deposit
insurance money in a time of crisis. Instead of this money going to the
depositors as it was planned, it will instead go to bailing out the bank
itself. See http://tiny.cc/z4jcuw for what the UK and USA have been thinking in
this area.

4.Long term low interest rates. By keeping
interest rates artificially low, the central banks are helping debtors incur
more debt through lower costs.However,
this means those with savings accounts are getting paid virtually nothing for
their savings. Those with investments for retirement are getting little as
well, meaning their retirement years will be poorer than they thought.

5.Lines of credit based on home equity.If you have equity (value) in your home,
banks are often pushing you to take on more debt by getting a line of credit
against your house. So they arrange a home equity line of credit and drive you
into debt. You lose some of your equity and you pay them interest for the privilege
of doing that!

6. Inflation. Governments
and economists claim that inflation rates are around two percent per year. In
your own world it may seem that prices are increasing faster than two percent
per year and you are right.Government
figures often do not include expense such as fuel and housing! By allowing real
world inflation to run around five percent and then by paying you nothing on your
savings, your own purchasing power and real value is decreasing while the cost
of the debt for government and banks goes down. Inflation is a silent but
effect thief!

The confiscation of
money in private bank accounts was generally thought of as being an illegal and
unacceptable practice. Now, as governments become desperate, is becoming a
matter of national policy, overturning years of protection for savers.

Sunday, March 24, 2013

***Please feel free to leave comments or ask questions at the bottom of the article. We will reply or will write a special article to answer your questions.***

With the negative
publicity and real risks being generated by the raid on savings in Cyprus, you
would almost think that policy leaders would see the danger in even talking
about more raids on savers.
﻿

Minister Cristobal Montoro (right)
seen in this photo with an American industrialist
- Photo from PBS.org

Not in Spain.Believe it or not, the Spanish government is
planning a depositors levy that will take some 0.1% to 0.2%
from the banks based on their total level of deposits.The difference appears to be that it will be
the banks that have to pay the levy, rather than the money being taken from
individual accounts. The new measures will take effect in a matter of weeks.

According to Treasury
Minister Cristóbal Montoro,
this levy will raise some 1.5 to 3 billion Euros.This will help “impose order in the Spanish
banking system” says the Minister without explaining how this will help.

We will only take this much - at least the first time!
Photo by CBC.ca

Like any good
politician, Mr Montoro says this is not his idea, but rather he is doing this
to remain compliant with the wishes of the European Commission.Again, no explanation of how this will keep
the EC happy.

QUESTION:Where will the banks get the 3 billion Euros
to pay this new tax which will be based on deposits?

ANSWER:Depositors?Stand by for more fees and lower service levels in Spanish banks as the
banks find a way to pay this new tax.

One thing is
clear.If you are a saver and you have
money, the highly indebted governments and banks will find a way of getting it.

This is economics
for the rest of us. Savers beware everywhere!

(For more on what
the Brits and the Americans are planning for their depositors, see http://tiny.cc/z4jcuw
)

Saturday, March 23, 2013

***Please feel free to leave comments or ask questions at the bottom of the article. We will reply or will write a special article to answer your questions.***

When people are in their own community, they can be quite peaceful.But when they are disenfranchised by the central government and placed in the context of

their national existence, they can suddenly turn rather violent. There

is a lesson in this for all the governments in Europe.

The face and nature of
the new urban Europe may be forming now
in the Exarchia District of Athens.

How do we know what social
unrest will look like in Europe as the downwardly mobile economy continues to disappoint?
How will masses of the unemployed rebuild after years of turmoil?What will the youth of Europe do when faced
with unemployment running to 50% or more?

Syntagma Square, Athens showing a
minor police vs crowd confrontation
on the 2012 national day. All photos by the author.

Surprisingly, the
Exarchia District may hold some clues as to what the future of Europe holds.
Being among the first areas to be hit by the economic downturn in Europe, it
has the most experience in how you live through an economic collapse.

﻿﻿

Last year, I spent a
few days in Athens, with most of the time spent in the Exarchia District.This area is known to be the “home” of the
rioters who occasionally attack Syntagma Square (Constitution Square) and other
iconic symbols of the Greek central government.

I have a strong interest
in economic matters and considerable experience in social unrest movements.I had read the usual warnings from foreign
embassies to stay away from the dangerous areas of Athens such as the Exarchia
District. I was also informed that the Exarchia District is so bad that even
the police will not go there, except in riot squads. Worst of all – OMG! – you
are warned about violent anarchists.

Mural in the Exarchia District

Lacking as I do the
proper amount of reverence for authority, the adventure path headed into the
district. However, I did consider myself properly warned and ready to bolt
should I run into hostile locals.Much
to my surprise, the next two days in the district were spent without so much as
a hostile glance from the locals – even though it was clear I was a foreigner.

What can we learn from
this experience?Why might this be
important for analysing the new future of Greece and Europe?

1.Despite the warnings from embassies about the
danger, there was not a single incident of violence nor was I threatened in any
way.And this was on the day before the
Greek national day and military parade in Syntagma Square.

2.The streets were relatively clean and free of
litter.Every available wall space,
however, was plastered with protest protesters and murals of every imaginable
subject.

3.I did not see a single credit or debit card
reader on a counter for a Visa, American Express or Master Card.All transactions were in cash.

4.Unlike the area around Omonia Square, it was noticed
that there is a vibrant trade occurring in food, electronic goods, services, clothing
etc.Very few store fronts were closed,
unlike much of the rest of Athens.In
Omonia Square, I was approached by local hawkers to buy anything from an
I-phone to cocaine. The square and the streets around Omonia Square were filled
with destitute people begging for food or money.Much to my shock, I saw few people like that
in the district.

5. There was not a
single sign or shop relating to a major international franchise such as
Starbucks, Costa, or McDonald's, unlike the rest of Athens.

6.Service at the sidewalk cafes on Exarchia
Square was friendly and efficient despite language barriers.The food (and beer) was good and under half
the cost of the downtown areas.

Public parking lot reclaimed by anarchist
group in the Exarchia District now
used as a meeting area, playground and flower garden.

7.Not a single police officer was seen for the entire time. It is not clear to me what
happens when something does go wrong.

Observations

A new and vibrant
sub-culture is being formed in the Exarchia District from the wreckage of the
Greek economy.Little solid information exists
about what is really happening there beyond anecdotal views such as my own.Clearly, an economy exists, but my best guess
is that little of what happens there is captured in the official Greek statistics
(which are known to be poor anyway).The
cash only economy appears to functioning well based on the number of shops open
and the high rate of foot traffic in the restaurants, bars and other
businesses.

Urban density in Athens.

Despite its fearsome reputation
as the home turf of violent anarchists, there was no visible stress or
hostility to foreigners such as myself.This
is really difficult to reconcile to the riots in Syntagma Square which can be
quite violent.

Conclusions

In much of urban Europe, it
is probable that self forming community structures will emerge which are only
loosely politically linked to the central authority.This linkage will be primarily though infrastructure such as water and
electricity rather than social services and law enforcement. Even the
infrastructure links will likely be less centralized than in the past as
technology will allows for more efficient localized power production. Less money will be spent on smart phones and
more invested in local enterprises.

The population in the
urban areas will be less accepting and trusting of central authority and will
seek to avoid it.At the same time, the
new urban population youth will have lower expectations of the central government
and will place less demands on it.Local
councils will have more self-awarded powers and will defer less to large city
mayors.

The urban community
will be able to maintain a standard of living with fewer resources as it will
seek to build value in the local community.Products will be bought from local suppliers rather than international
ones (i.e. no frozen French fries imported but local potatoes instead).Businesses will be locally owned with no
franchises – especially international ones.International franchises such as Starbucks mean that a larger share of
every purchase leaves the community. Menus will feature more local, fresh and
inexpensive products obtained from shorter supply chains which will mean safer
and healthier food.(For a humorous
look at this issue see:“Waiter, there
is a horse in my soup” at http://tinyurl.com/a5dz86b
)

A cash economy means
more value stays in the local community. Every time a credit card or debit card
is used, value leaves the local community and goes to large, centralized and
international banks. Less money will be kept in banks.

Youth in the
traditional 16-29 category will continue to be hard hit. They will have to create
their own opportunities in the local area or head to a more rural existence. This will be the
toughest part of adapting to the new economy, especially given that the youth
now are better educated in academic skills, but less competent in the technical
skills of running a small business or managing a food producing property.

And perhaps most importanlty, the behaviour
of people may become increasinly contextual. When they
are in their own community, they can be quite peaceful.But when they are disenfranchised by the
central governmentand placed in the context of their national existence, they
may suddenly turn rather violent.Somewhere in here is a lesson for most of the governments of Europe (and
maybe everywhere).

Outlook

This is the future of
what economics may look like for the rest of us.Time to start paying closer attention.

Montreal police
arrested 200 people on Friday, 22 March 2013 as part of a student protest
designed to “celebrate” the anniversary of a major student protest last year.

﻿

A small gathering of Anarcho-Primivitissts at an April 2012 protst.
Most of the violence came from small groups such as this, not the
main student groups. All photos in this article by the author.

The popular perception
of the current events in Montreal is that students are protesting against an
increase in tuition fees.While fee
hikes are one issue, a deeper series of problems is playing out in the
background. Included in this are concerns about upcoming austerity measures and
the nature of education itself.Unnoticed
by many Canadians, this protest movement was in fact driven by a combination of
austerity measures and the financialization of the economy.

﻿

The former Quebec Education
Minister (Liberal) Line Beauchamp had stated that the fee increases were part
of an overall reform program. This program was inspired by the European
“Bolongne Process” for higher education.Student leaders and many professors believe that the new “quality
assurance” measures were in fact an underhanded method of reducing university
education from (using Aristotle’s terms) a “liberal education” which produces problem
solvers who can integrate knowledge over boundaries to a “servile education.”
In this servile form of education, the student is reduced to performing a
certain series of tasks which are determined by industry, banks or
government.Three major student groups
as well as some professors unions in Quebec had been protesting this policy
last year.

Or as George Carlin
put it:They want people who are just smart enough to run the machines and do
the paperwork but just dumb enough to passively accept all these increasingly crappier
jobs with the lower pay, the longer hours, reduced benefits, the end of
overtime and the vanishing pension that disappears the minute you go to collect
it.

U de Montreal bookshop as seen in April of 2012. Note the
references to indigenous movements, OCCUPY and Los Indignados

Notice the reference to banks in the bottom right
hand corner.

Student literature has
identified bankers (among others) as being targets for the ongoing
protests.Student leaders fear they are
being asked to pay more for an education which is increasingly tailored to
serve the interests of “business people, bankers and other private managers”
rather than the broader needs of society or the students themselves.

It might be a good
idea for politicians and the press to pay closer attention to what is happening
in Quebec.A student movement has
(arguably) been able to force a government from power in an election while continuing
to challenge the views of the new government.

***Please feel free to leave comments or ask questions at the bottom of the article. We will reply or will write a special article to answer your questions.***

Photo by Reuters

It is unlikely that we
will see Prime Minister Cameron washing socks for the Chelsea Pensioners over
at the Royal Hospital Chelsea.Nor are
we likely to see President Obama visiting inmates at Guantanamo Bay.No one should hold their breath to see if
Prime Minister Netanyahu will wash the feet of Palestinian convicts any more
than the leader of HAMAS would wash the feet of Israelis wounded by suicide
bombers.Still.....

Washing the feet of
drug addicted convicts in a prison appears to be part of a larger lifestyle and leadership
method for this new Bishop of Rome. The Vatican may yet regain some of it moral
authority as Pope Francis the First appears to be exhibiting some strange behaviour
for a high public figure – humility.

Pope Francis seems to
have a genuine humility which he has exercised while living as a bishop and
archbishop.This is not the sort of fake
humility exhibited when Hollywood stars or politicians get their pictures taken
at a homeless shelter in order to show they are “good people.”

This humility may have a significant economic and
financial impact in an unexpected way.

Currently, much of the
population in the Christian world and elsewhere has become adapted to public
displays of incredible wealth and arrogance by leadership figures. In the USA
for instance, leaders in the automotive industry flew their private jets to
Washington in order to beg for taxpayer dollars to bail out their mismanaged
enterprises.

﻿﻿

Photo from Yogesh Pandey

Arrogance breeds risk
taking.This has been especially clear
in the banking sector as the “Masters of the Universe” who run The City and
Wall Street have made a series of disastrous decisions over the last twenty
years.Arrogance also believes that
other should have to pay for your mistakes, as we have seen in the banking
sector as various banks have demanded huge bailouts while their leaders take
bonuses which are astronomical.

It is doubtful that
even Galileo could conceive of the vastness that is the arrogant universe of
today’s leadership figures who put themselves alone at the centre of their
worlds.

Humility, on the other
hand, tends to breed responsibility and a bit of caution.Humility also tends to breed integrity – a quality
which is sorely lacking in the governmental and banking sectors at the
moment.How is one to have confidence in
the IMF, for instance, when its last leader was arrested and its current leader
has her flat raided by corruption police?

The advanced economy
democracies are facing at least of another decade of economic deprivation
brought about by the hubris of its leaders.What we are seeing now in Greece, Spain, Cyprus and Ireland is what we
will start to see in France, the UK, the USA and Canada as our debt and
arrogance catch up to us.

If the Pope continues
his behaviour of humility, his actions will become a considerable embarrassment
for the other leaders in public life. This humility carries its own risks – strong forces
will oppose a leadership role being used in such a manner.

However, by exhibiting
such behaviour in public, he may over the medium term gradually impress upon
other leaders that their role in life is not to display arrogance and hubris. Their power and influence might be used for the overall improvement of society rather than the raw
extraction of existing wealth.

Can the Pope fix the
economy?Not likely. Can the Pope embarrass
other leaders in the banking and government world into accepting more humility
in their lives?Time will tell.

Friday, March 22, 2013

Warning:The bankers and the government will get your savings one way or another.

Note the protest sign at top: Banks in Spain cheat on you!

BBC News - Getty Images

If you think Cyprus is
a mess and the people there might get their savings accounts raided, wait until
you see what the bankers and the government have just done in Spain.

Following the housing market
crash in Spain, a number of regional banks were rapidly moving towards
bankruptcy.As a means of fixing this
problem, the Spanish government and its central bank orchestrated a 2010 scheme
whereby seven of the banks would be rolled into one and recapitalized.

As a means of raising
cash for this new creation to be known as “Bankia” Spanish citizens were told
by their local bankers that they could buy shares. Based on years of trust and government
approval, some 350,000 Spanish citizens sank their hard earned cash into the
new shares.

The Bankia shares were
valued at 3.75 Euros and the citizens were told the bank would have a rough
start followed by a return to profitability in a relatively short time.Indeed, the bank announced that for 2011 it
would make a small profit of 309 million Euros.

Small problem
however...

Instead of making some
300 million Euros as announced, the bank later re-estimated its accounts and
stated that it would lose approximately 3 BILLION Euros instead.

On top of all of that,
the bailed out bank would need to be bailed out again.

The upshot for the
Spanish citizens was that their 3.75 Euro shares were today valuated at – get this
-.01 Euros or one cent apiece.To add insult to injury, the Spanish government
has also announced there will be a sort of inverse stock split of 100 to 1.

In other words, for
every 100 shares you have in Bankia, they will now be turned into one share
that will be worth 1 Euro.

Spanish savers (350,000
of them) were given a major haircut. Their 3.75 a piece share actually bought
them 1 cents worth of value.

How is that for a haircut?

There is a lesson in
this. Savers have money.And when the
bankers and the governments decided they need it – they will take it one way or
another.

In Cyprus, the savers
(and the non-resident Russians) may lose some of their money in an involuntary onetime
tax or levy. In Spain, the savers were just fleeced the old fashioned way by
con artists.

This is economics for
the rest of us.Savers beware no matter
where you are!

What can you do about
horse meat showing up on your plate or in your burger?

A long supply chain
means no control of what you are eating.The recent series of scandals concerning horse meat showing up in
burgers, frozen lasagna and IKEA meatballs highlights two of the major problems
with globalization.This is just the
surface of the problem.No doubt there
are other things going on we have not heard about yet.Hopefully there is no soylent green in the
food chain yet! (Cultural reference to the 1973 science fiction film of the same name. Google it. Scary stuff.)

But seriously, when a supply chain reaches
hundreds or thousands of kilometres and spans national borders, little control
can be exerted even if the buyers are motivated to ensure good products.A live horse can be sold in Belgium or the UK,
shipped to Poland or Hungary and the meat can be resold in Romania.It can then be relabeled and shipped to
France or Spain or Ireland. Then it can be processed as beef and sold in the UK
or anywhere else.

The second problem is
that the consumer or final-point-of-sale retailer really has no ability to find
out what went wrong or who to blame. In addition, trying for a resolution by suing
those responsible can be a tiresome process with limited prospects of success.And that is just within Europe.Imagine what happens when the food supply
chain runs through China or India.Good
luck establishing responsibility in that case.

Then there is the
issue of dog meat entering the supply chain in Spain. Don’t even think about
that one...

What can the consumer
or small local retailer do about this problem? The answers are rather simple.

First, if you are a
retailer, buy from a local supplier who has a short supply chain.Your ability to monitor and trust goes up if
you have a good view of your local supplier.

Second, as a consumer,
you should always buy food that as closely as possible resembles
its original form. If you are buying highly processed pre-made frozen meals,
you really have no idea of what that “beef” might be in your frozen lasagna.
However, if you buy a pork chop or some ground beef, your own eyes should do a
good job assessing what you have. You can also see the person who is selling it to you if you buy from a local butcher shop. So again, trust goes up a bit.

The answers?

Buy locally produced
food.

Buy real food that has
not been heavily processed.This goes
for both meat and vegetables.

Both of these choices
are probably good for you – in health terms and for your local economy.

This is economics for the rest of us - enjoy that lasagna that comes from a globalized supply chain. As for me, I have a sudden craving for a nice bag of oats!

***Please feel free to
leave comments or ask questions at the bottom of the article. We will reply or
will write a special article to answer your questions.***

Yes, they are planning to take your savings in the USA, the UK and the EU.

Katia Christodoulou / EPA

A woman unsuccessfully attempts to withdraw from a Cypriot bank ATM in Greece on Sunday.

A recent paper by the Bank of England and the American Federal
Deposit Insurance Corporation (FDIC) demonstrates that both governments have a plan to take your
savings money in a financial crisis. Scarily enough, the paper was published in December 2012.

As recent events in Cyprus, Spain, Portugal, Greece and Italy have shown, an unthinkable financial crisis can actually emerge at any time - just like it did in 2008. The 2008 crisis required trillions of dollars (pounds, euros) to bail out broken banks.

So, you have to ask yourself: Could my government take my money out of my savings account?

The answer is almost every case is “Yes”.In the USA, the UK and the EU, not only is it
possible, but the reality is that two of the governments have just recently discussed how they would take your money.As with almost all economic writing, it lacks
clarity and appears bland, but when read and reread it several times, it is
chilling.

The title of the paper
is Resolving Globally Active,
Systemically Important, Financial Institutions.

A translation is necessary
here.To an economist or banker the term
“resolving” means “giving money to.” “Globally active” means a bank that has
operations in more than just one country.The term “systemically important” is banker speak for “we think this bank is too
big to fail and therefore we have to bail it out.”The term “financial
institutions” refers to banks as well as large insurance companies such as
Lloyd's of London or AIG in America.

The title of this
paper is actually “In the event of
another financial crisis like the one in 2008, we are going to take money from
savers and tax payers and give it to the international banks which are holding us as financial hostages by
being too big to fail.”

As an aside, this is also an indirect admission that the problems that caused the 2008 financial crisis have not been addressed.

Have a look at the following key paragraph, and then see the
explanations below.

34. The U.K. has also given consideration to the recapitalization
process in a scenario in which a G-SIFI’s liabilities do not include much debt
issuance at the holding company or parent bank level but instead comprise
insured retail deposits held in the operating subsidiaries. Under such a
scenario, deposit guarantee schemes may be required to contribute to the
recapitalization of the firm, as they may do under the Banking Act in the use
of other resolution tools. The proposed RRD also permits such an approach
because it allows deposit guarantee scheme funds to be used to support the use
of resolution tools, including bail-in, provided that the amount contributed
does not exceed what the deposit guarantee scheme would have as a claimant in liquidation
if it had made a payout to the insured depositors. That is consistent with
the contribution requirement that is already imposed on the Financial Services
Compensation Scheme in the U.K. in the exercise of resolution powers10 and simulates
the losses that would have been incurred by those deposit guarantee schemes
during bank insolvency. But insofar as a bail-in provides for continuity in
operations and preserves value, losses to a deposit guarantee scheme in a
bail-in should be much lower than in liquidation. Insured depositors
themselves would remain unaffected. Uninsured deposits would be treated in line
with other similarly ranked liabilities in the resolution process, with the
expectation that they might be written down.

The abbreviation RRD
refers to the European Union Recovery and Resolution Directive.In other words, the joint UK and USA paper
actually has its roots in the large European Union, so the concepts in this
paper could easily be applied to the other countries in the EU.(Hello France and Belgium and yes even Germany!!)

The following words
are key to the intent of the authors:it
allows deposit guarantee scheme funds to be used to support the use of
resolution tools, including bail-in.This means that money that is intended to be given to depositors
(savers) in the event of a bank failure can instead be given to the bank itself
as a means of resolving the crisis.

In other words,
depositors are told that the first 100,000 dollars (pounds, Euros) of their
savings are guaranteed by a government program so that even if the bank fails,
the depositor will get their money back up to the agreed limit.

Now, the new plan is to give that guaranteed money to
the bank, rather than the depositor.

The theory behind
this is explained in the second underlined section. These economists have the
idea that if the bank is going to fail, why not give it the guaranteed money to
the bank so it can continue operations, and small depositors will then not lose
any money as the bank keeps going.They
also appear to reason that larger depositors (more than 100,000) may lose money
in the event, but that this plan will be cheaper overall.

On the surface,
this accounting trick may sound reasonable, but the plan is deeply flawed.

First, it breaks
the guarantee that you will get your money back if there is a bank failure.

The bank gets it.

More importantly,
it does not address what will happen after the deposit guaranteed money is
given to the bank.The flaw is that if
the public becomes aware of the money transfer – and they will – then the large
depositors and bond holders will lose faith in the institution.They will quietly take out their money as
soon as they can, and then the cycle starts over again.The outcome is that the bank will fail again.Only this
time, the money that should have gone to the small time depositors from the
FDIC is already gone – taken by the bank!So another bailout is needed. This is simply a wealth transfer from the
government to the banks at the expense of the saver and taxpayer.

Behind all the
laws, rules and economic jargon that no one can really understand, there are
some real world facts that cannot be changed.

They are:

1.Most of the advanced Western democracies have
crippling debt levels that they cannot fix through increased austerity, taxes
or increased stimulus.They will need to
find more money and they need it soon.

2.The governments and banks of the advanced
democracies are run by persons who have a significant interest in maintaining
the status quo which gives them their power and wealth.

3.When government and banks need more money,
they will get it. They will change the laws to make this happen.

4.Savers have money, debtors do not.

5. Governments and banks have multiple ways of
getting this money, either though taxes, fees, low interest rates or inflation
or – most simply – just taking it as they are now discussing in this paper.

Conclusion

The belief that your
money is safe in a bank due to the government guarantee on the first 100,000 is
no longer a valid concept.Those that
have the power (Banks and Governments) may need this money soon.If you have it, they will find a way of
taking it.

About Me

Hi there! We here at the Honest Banker do not have PhDs in Economics like Ben Bernanke over at the US Federal Reserve. Nor do we have Harvard degrees like Governor Mark Carney of the Bank of Canada/Bank of England. We are not quants with math degrees. What we do have is practical education and honest experience. We contribute to the real world economy while trying to figure out how to survive and build value in our lives and our communities under the current economic model. This model has been dictated to us by economists and politicians using many of the same seriously failed economic models that gave us the financial collapse of 2007 and 2008.
This is “economics for the rest of us” who live in the real world and are trying to figure out how to survive in it despite what the financial sector is doing to us.